The March flash HSBC PMI for China came in weaker than expected at 48.1. The market consensus was looking for a modest rebound from the 48.5 recorded in February. The further softening of the data confirms our suspicions there has been more to the recent soft data than just the usual New Year volatility.
The production sub-index moved to an 18-month
low. But despite the overall weakness in
the index the new exports orders sub-index moved back into expansion in
March. That’s consistent with our story of a soft
start to the year from a growth perspective on domestic weakness, but with some
strength in exports emerging as the year progresses. On balance though this result has put further
downside risk on our year to March 2014 GDP forecast of 7.4%.
Perhaps the biggest surprise in the result was
the rebound in the employment sub-index from 47.2 to 49.3. The labour market remains a key determinant
in the leadership determining the balance between pushing on with the reform agenda
or cyclical support for the economy. A March
GDP result much below our estimate will likely lead to new measures to support
growth which we expect would be focussed on fiscal stimulus (infrastructure)
and liquidity provision.
The official PMI index is released next
week (April 1st). The HSBC
index is narrower focussed than the official index and tends to be more
volatile. Importantly the official index
captures the larger state owned enterprises.
That release will be the next critical piece of data to help inform the
extent of the slowdown at the start of the year and the likelihood of any
policy intervention. Watch this space.